Reversal Of ITC For Earlier Tax Period Cannot Be Deducted From ITC Availed During Refund Period: GSTAT

The Goods and Services Tax Appellate Tribunal (GSTAT), Ranchi, has held that an ITC reversal relating to an earlier tax period cannot automatically be deducted from the ITC availed during a refund period merely because the reversal was recorded during that period.

The ruling concerned paragraph 43(c) of CBIC Circular No. 125/44/2019-GST, which the Revenue relied on to argue that ITC reversed through GSTR-3B during the refund period could not be treated as ITC availed during that period.

Rejecting that interpretation, the tribunal observed:

“Paragraph 43(c) cannot be read as laying down a proposition that every reversal made during the relevant refund period must necessarily be treated as a reduction of the ITC availed during that very period, irrespective of the period to which the underlying credit relates.”

Such an interpretation would effectively add words to Rule 89(4) of the CGST Rules, the tribunal held. The rule specifically refers to ITC availed during the relevant period.

"Such an interpretation would effectively add words to Rule 89(4) of the CGST Rule. The Rule does not say that “NET ITC” shall mean the ITC availed during the relevant period minus every ITC reversal made during that period. It specifically refers to ITC availed during the relevant period. The Paragraph 43(c) must consequently be applied consistently with Rule 89(4) but clarification and its interpretation is also disconnecting the letter & spirit of the Rule 89(4) of the CGST Rule formula from the actual ITC availed during the relevant period in as much as most interestingly in this case of Reversal ITC never be a part of “NET ITC” for calculation of actual refund", the tribunal added.

Judicial Member Tushsar Kanti Satapathy and Technical Member Bijoy Bihari Mahapatra made the observation while dismissing the Revenue's appeal against a ₹35.84 lakh refund granted to Shivam Iron & Steel Co. Ltd.

The dispute was over how “Net ITC” should be calculated for a refund claim relating to zero-rated supplies. Rule 89(4) of the CGST Rules sets out the formula for calculating a refund of unutilised ITC on exports made without payment of GST. It defines Net ITC as the ITC availed on inputs and input services during the relevant period. The rule defines the relevant period as the period for which the refund claim is filed.

Shivam Iron manufactures and exports mild steel billets. It exports the goods without payment of GST under a Letter of Undertaking. Its raw materials, including coal, attracted Compensation Cess, while the finished steel billets did not. This led to accumulation of unutilised Cess credit in its electronic credit ledger.

The company sought a refund of accumulated Cess credit on exports made between July 2022 and March 2023. The authorities sanctioned and later upheld a ₹35.84 lakh refund. The Revenue challenged this, arguing that a ₹2 crore Cess ITC reversal recorded during the refund period should be deducted from Net ITC, even though it related to an earlier period.

Shivam Iron disputed this, saying the reversal had no link to the refund period. The tribunal accepted this position, noting that the reversal related to an earlier period and could not be attributed to ITC availed during the refund period.

The ₹65.07 lakh figure was used specifically by the tribunal in addressing whether the ₹2 crore reversal could have related to ITC availed during the refund period.

The tribunal also examined whether paragraph 43(c) of the circular could be applied in a manner that altered the formula under Rule 89(4). It referred to Supreme Court decisions holding that departmental circulars bind tax authorities but cannot override statutory provisions.

It held that paragraph 43(c) must be applied consistently with Rule 89(4). The rule does not provide that Net ITC means the ITC availed during the relevant period minus every ITC reversal made during that period.

The tribunal held that the refund had been calculated under Section 54(3) of the CGST Act and in accordance with Rule 89(4) of the CGST Rules.

Finding no infirmity in the first appellate authority's order, it upheld the ₹35.84 lakh refund and dismissed the Revenue's appeal.

For Appellant/Revenue: Tanmoy Kumar Mandal, Assistant Commissioner, CGST, Ranchi.

For Respondent/Shivam Iron & Steel Co. Ltd.: Rahul Kumar Modi, CA.